Sandeep Agarwal, a businessman in Bangalore recently gave up on a great opportunity to live in an upscale neighbourhood with great amenities.
The reason:?The rent was affordable, the purchase price of the same apartment was not. Hailing from a traditional business family, Sandeep considered paying rent as a criminal waste of money. But consider the choices in front of him:
Dream house
- Rent of the apartment that he would love to live in would be Rs 25,000 per month.
- The price of the dream apartment if he wanted to buy it would be Rs 1 crore.
- Down payment for purchase of the house would be Rs 20 lakh.
- EMI on home loan of Rs 80 lakh for 20 years at 11 per cent interest would be Rs 82,575.
Compromise house
- Price of the apartment to purchase would be Rs 50 lakh.
- Down payment would be Rs 10 lakh.
- EMI on the home loan of Rs 40 lakh for 20 years at the rate of 11 per cent would be Rs 41,288.
Now, suppose Sandeep decides to live on rent in his dream house for Rs 25,000 per month, and own the second property at an EMI of Rs 41,288. He would be able to live in his dream house while at the same time restricting his outflow to Rs 66,288, as opposed to Rs 82,575, if he had bought the dreamhouse.
He would own a property by paying Rs 10 lakh down payment instead of paying Rs 20 lakh. He can earn rent on his house of about Rs 12,000 per month, further reducing his monthly outflow to just a little above Rs 50,000.
In these uncertain times, it is better to avoid high interest payments while still being able to buy an asset in the form of a house. Also there is no certainty that the value of the bigger house will appreciate faster than the ‘compromise’ option.
One hears of several reports predicting a slowdown in the real estate market caused by unsold inventories with builders, resulting in slower price rises or perhaps even price reductions. You might have heard of several instances of people having made excellent returns by investing in property at the right time.
You might also have had instances of having let opportunities slip by. However, it’s prudent to remember that the past behaviour of any market is not any guarantee or indicator of the future.
If anything, greed and the eternal belief in property prices always going up have caused one of the biggest market crashes and depressions many of us might see in our lifetimes.
People are now waking up to the fact that a continuous rise in real estate prices is not a given. Several areas have seen rates stagnate over the last few years. So, it pays to play around with the numbers before firming up your opinion on what’s the right thing for you.
(The writer is the co-founder and CEO of Bigdecisions.in)
